Market Overview

Check Out The Chart: When Equal-Weight Fails

The efficacy of equal-weight ETFs, a strategy pioneered by ETF sponsor Rydex, has been proven time and again over the past several years. As many equity-based ETFs have been criticized for excessive weights to just one or two stocks, Rydex has turned the equal-weight approach into meaningful profits for investors.

That sentiment extends to both the broader market as the Rydex S&P 500 Equal Weight ETF (NYSE: RSP) has consistently outclassed the SPDR S&P 500 Trust (NYSE: SPY) and to the sector level as Rydex offerings in the health care and materials spaces, just to name a pair, have outperformed their SPDRs or iShares rivals.

Well, the equal-weight approach isn't perfect and one sector where it appears to be leaving something to be desired is in tech, specifically with the Rydex S&P 500 Equal Weight Technology ETF (NYSE: RYT), today's “Check Out The Chart” subject.

If recent investing in the tech sector has taught us anything, it is that we want excessive exposure to Apple (Nasdaq: AAPL). Drilling down to the past week or so, we can say that it would be nice to be involved with an ETF that has large weights to IBM (NYSE: IBM) and Google (Nasdaq: GOOG) in addition to Apple.

RYT doesn't offer that. In fact, that trio of tech titans only accounts for about 4.5% of the ETF's weight. That explains why as other tech ETFs have started to show signs of life thanks to the spate of stellar earnings from tech's biggest names, RYT has lagged and now the chart shows a series of lower highs and lower lows.

Year-to-date, RYT has been easily outpaced by the Technology Select Sector SPDR (NYSE: XLK) and the PowerShares QQQ (Nasdaq: QQQ). If support at $52 were to be violated, downside risk could equal the mid-40s.

Another, non-chart quibble with RYT: How is eBay (Nasdaq: EBAY) the ETF's fourth-largest holding, but Amazon (Nasdaq: AMZN) is nowhere to be found.

Bottom line: Equal-weight ETFs can and do work, but that isn't the case with RYT. The chart says as much. Check it out.

Posted-In: Earnings Long Ideas News Sector ETFs Broad U.S. Equity ETFs Short Ideas Specialty ETFs Technicals

 

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